Question

Sally’s Craft Corner was opened in 2003 by Sally Moore, a fashion designer employed by Bundy’s Department Store.Sally is employed full-time at Bundy’s and travels frequently to shows and marts in Vancouver, Montreal, and Toronto. She enjoys crafts, wanted a business of her own, and saw an opportunity in Vancouver. The Corner now sells regularly to about 300 customers, but business only began to pick up in 2010. The staff presently includes two salespeople and four office personnel, and Sally herself helps out on weekends.Sales have grown, as has the Corner’s reputation for quality crafts. The history is as follows:

With an expanding business and a need for inventory, the Corner is now cash poor. Prices are getting higher every month, and Sally is a little worried. The net cash flow is only about $400 per month after allowance of a 3% discount for timely payments on account.So, she has engaged you as auditor and also asks for recommendations you might have about the cash flow situation. The Corner has never been audited. During your review of internal control, you have learned the following about the four office personnel:Janet Bundy is the receptionist and also helps customers. She is the daughter of the Bundy Department Store owner and a longtime friend of Sally. Janet helped Sally start the Corner. They run around together when Sally is in town. She opens all the mail, answers most of it herself, but turns over payments on account to Sue Kenmore.Sue Kenmore graduated from high school and started working as a bookkeeper-secretary at the Corner in 2010. She wants to go to university but cannot afford it right now. She is very quiet in the office, but you have noticed she has some fun with her friends in her new BMW. In the office, she gets the mailed-in payments on account from Janet, takes payments over the counter in the store, checks the calculations of discounts allowed, enters the cash collections in the cash receipts journal, prepares a weekly bank deposit (and mails it), and prepares a list (remittance list) of the payments on account. The list shows amounts received from each customer, discount allowed, and amount to be credited to customer’s account. She is also responsible for approving the discounts and credits for merchandise returned.Ken Murphy has been the bookkeeper-clerk since 20X6. He also handles other duties. Among them, he receives the remittance list from Sue, posts the customers’ accounts in the subsidiary ledger, and gives the remittance list to David Roberts. Ken also prepares and mails customers’ monthly statements. Ken is rather dull, interested mostly in hunting on weekends, but is a steady worker. He always comes to work in a beat-up pickup truck—an eyesore in the parking lot.David Roberts is the bookkeeping supervisor. He started work in 20X7 after giving up his small practice as a PA. He posts the general ledger (using the remittance list as a basis for cash received entries) and prepares monthly financial statements. He also approves and makes all other ledger entries and reconciles the monthly bank statement. He reconciles the customer subsidiary records to the accounts receivable control each month. David is very happy not to have to contend with the pressures he experienced in his practice as a PA.

Required:a. Draw a simple flow chart of the cash collection and bookkeeping procedures.b. Identify any reportable conditions or material weakness in internal control. Explain any reasons why you might suspect that errors or irregularities may have occurred.c. Recommend corrective measures you believe necessary and efficient in thisbusiness.